Markets welcome new global banking rules
9/13/2010BASEL, Switzerland — Bank stocks rose Monday on news that global regulators have agreed on new banking rules aimed at averting another financial collapse.
The new rules, which will gradually require banks to hold greater capital buffers to absorb potential losses, are likely to reshape the credit industry by imposing stricter discipline on credit cards, mortgages and other loans.
But the requirements will be phased in over a period of years, which cheered investors. Stocks in French banks BNP Paribas and Societe General rose 2.2 percent and 4.7 percent, while Swiss bank UBS AG, which was particularly hard hit during the subprime crisis, rose 1 percent. Rival Credit Suisse Group was up 2.3 percent.
Shares of Britain's biggest bank HSBC PLC rose 2.6 percent in morning trading while Unicredit of Italy saw its stock jump 3.2 percent.
Fears that banks will have to raise large amounts of capital, hitting their profits and shareholder dividends, depressed some bank stocks in early trading, including those of Deutsche Bank AG. But by mid-day Deutsche Bank investors had shrugged off those concerns, sending the stock up 1.4 percent.
Requiring banks to keep more capital on hand will restrict the amount of loans they can make, but it will make them better able to withstand the blow if many of those loans go sour.
Down the line consumers could see banks tighten their rules on loans and possibly impose higher banking charges as financial institutions spend the next few years building reserves to meet the new regulatory requirements.
But Teresa Nielsen, an analyst at private bank Vontobel in Zurich, said consumers could also benefit. “The lower than feared minimum capital requirement and longer implementation time frame could potentially lead to banks being more open to give loans to companies and private people which again could improve the economic situation worldwide,” Nielsen said.
Deutsche Bank's Chief Executive, Josef Ackermann, said Monday that he thought the Basel III package was a good one.
“I think the decisions that were taken are the right decisions, they go in the right direction, and I also believe the fact that they gave the banking industry so much time for implementation clearly reduces the effects on the real economy, which is also very positive,” he said.
“So it's a well rounded good package that we fully support.”
France's banking federation said French banks were “among those with the greatest capacity to adapt to the new rules.”
In a statement, the federation noted however that it remained concerned that the new rules would put “a strong constraint that wil inevitably weigh on the financing of the economy, especially the volume and cost of credit.”
Some major banks, particularly Switzerland's two biggest UBS and Credit Suisse, will likely face additional requirements because of the threat their collapse would pose to the national economy, Nielsen said.
Requiring banks to keep more capital on hand will restrict the amount of loans they can make, but it will make them better able to withstand the blow if many of those loans go sour. The rules also are intended to boost confidence that the banking system won't repeat past mistakes.
Under current rules, banks must hold back at least 4 percent of their balance sheet to cover their risks. This mandatory reserve — known as Tier 1 capital — would rise to 4.5 percent by 2013 under the new rules and reach 6 percent in 2019.
In addition, banks would be required to keep an emergency reserve known as a “conservation buffer” of 2.5 percent. In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 percent of its balance sheet.
U.S. officials including Federal Reserve chairman Ben Bernanke issued a joint statement Sunday calling the new standards a “significant step forward in reducing the incidence and severity of future financial crises.”
Representatives of the Fed, the ECB and other major central banks agreed to the deal Sunday at a meeting in Basel, Switzerland. It still has to be presented to leaders of the Group of 20 forum of rich and developing countries at a meeting in November and ratified by national governments before it comes into force.
The agreement, known as Basel III, is seen as a cornerstone of the global financial reforms proposed by governments stung by the experience of having to bail out some ailing banks to avoid wider economic collapse.